Chapter Twelve: Module Quiz -- Fiscal Policy

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income taxes increase
when the economy recovers.
welfare reform makes it
more difficult to receive welfare even when the economy enters a
recession.
unemployment benefits
increase when the economy's output falls.
food stamps increase as
more people become unemployed.

Fiscal Policy is often not very timely because of the long lags
involved. Suppose the government recognizes the economy is going into
recession and begins the process to reduce tax rates. The time it takes
government to pass a tax reduction bill is called the

Suppose the economy is in a recessionary gap of $5,000 and the output
multiplier is 4. By how much should government expenditures change in
order to eliminate this gap?

+$5,000
-$5,000
+$1,250
-$1,250
+1,000

Fiscal policy is used less frequently than monetary policy as a
stabilization tool because

expansionary fiscal
policy leads to increased deficits.
fiscal policy has
serious lag problems.
fiscal policy is
heavily involved in the political process, which means that making sound
economic
decisions is more difficult.
all of the above

Supply-side economics argues that a cut in taxes will

lead to a windfall for
the rich and increase the deficit.
lead to a strong
incentive for people to work more hours and invest in new capital.
lead to a more equal
distribution of income.
shift the Aggregate
Supply curve to the left.

If tax cuts are implemented, supply-siders argue
that deficits may not increase because

the Laffer curve
suggests that taxes may be so high as to seriously discourage
production. A reduction in those taxes may lead to an increase in new
output and hence more overall revenue
supply-side economics
should be accompanied by reductions in government spending
economic growth will
increase quickly, increasing total government revenues
all of the above